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Fitch Rates University of Maryland Medical System (MD) $395MM Revenue Bonds 'A'.

NEW YORK -- Fitch Ratings assigns an 'A' rating to approximately $395 million Maryland Health and Higher Educational Facilities Authority revenue bonds, University of Maryland Medical System Issue (UMMS), series 2006. The series A-F bonds will be issued as fixed-rate and auction-rate securities, and variable-rate demand bonds. The series A bonds will be issued as uninsured fixed-rate bonds, while the series B, C and D bonds will be issued as auction-rate securities. The series B-F bonds are expected to be insured by FGIC, which Fitch rates 'AAA'. The series E and F bonds will be issued as variable-rate demand bonds and will also be supported by the delivery of a liquidity facility provided by Dexia Credit Locale. Fitch expects to assign ratings to the series 2006B-F bonds nearer to their closing. In addition, Fitch has affirmed the 'A' rating for UMMS' outstanding debt. The Rating Outlook is Stable.

Bond proceeds will be used to fund routine, replacement and strategic capital needs of the system, including the construction of a new ambulatory care building at the system's flagship hospital, University of Maryland Medical Center; the construction of a new inpatient tower at Baltimore Washington Medical Center; and expansion of the existing emergency room at Shore Health System, the system's newest affiliate. The series 2006A bonds are expected to sell the week of Oct. 23 via negotiation with JP Morgan. The series 2006B, C and E bonds are expected to sell the week of Nov. 6 via negotiation with JP Morgan. The series 2006D and F bonds are expected to sell the week of Nov. 6 via negotiation with Banc of America Securities.

The rating is based on the institution's continued profitability trends, strong state support, stable market position, increasing utilization, favorable rate increases, exclusivity of services in certain niche markets, and strong continued reinvestment in plant. Note that this analysis is based on internally generated documents and not on audited financial statements. Fitch does not expect any material changes between UMMS internally generated documents and fiscal year 2006 audited financial statements. The system's profitability has also been assisted by favorable rate increases from the Maryland Health Services Cost Review Commission. While operating performance was slightly behind last year's numbers, UMMS produced good profitability in fiscal year 2006, earning $51 million from operations (3.3% operating margin) and $62.6 million on the bottom line (4.0% excess margin), not including a one-time loss on early extinguishment of debt. This is slightly behind last year's performance when the system generated a 4.0% operating margin and 5.1% on the bottom line. This modest decline in profitability from prior years' performance stems from the additional costs associated with a 4.4% increase in admissions from fiscal year 2005. UMMS continues to receive strong state support for its capital needs. In fiscal year 2006, UMMS received $15 million from the state in support of its extensive capital plans. Fitch views favorably the system's continued reinvestment in its plant. For fiscal year 2006, capital expenditures as a percentage of depreciation expenses increased from 135.4% to 218.8%., well above Fitch's 'A' rated medians.

Credit concerns include the system's light liquidity stemming from its continued reinvestments for capital, future capital needs, and a competitive market. Management expects to invest $1.14 billion over the next five years (2007-2011) for various facility projects including a systemwide expansion and upgrade of its information technology, which Fitch views as critical to UMMS' continued success. Liquidity ratios and debt to cap ratios, which historically have been below Fitch's 'A' rated medians because of the system's substantial investment in plant over the past several years, will be further stressed after this financing. However, management projects that liquidity ratios will gradually improve to 120 days by fiscal year 2011 and debt to cap ratio is not expected to exceed 51.9% over the next five years. UMMS had 116 days of cash on hand and 70.5% cash to debt ratio as of June 30, 2006. UMMS operates in a competitive environment with several other large tertiary academic medical centers in the service area. As of June 30, 2005, UMMS had a market share of 15.5%, behind the 16.4% for Johns Hopkins Health System and 17.9% for MedStar.

UMMS is an integrated health care network, providing hospital and physicians' services from seven hospital locations, multiple primary and specialty care centers, and other health-related entities throughout the Baltimore region. University of Maryland Medical Center, its key institution, is a full-service tertiary and quaternary academic medical center with 669 licensed beds. UMMS had $1.5 billion in total operating revenue for fiscal year 2006, based on internally generated unaudited statements. Fitch does not expect any significant change in financial performance when audited financial statements are available. UMMS covenants to provide quarterly and annual financial disclosure to bondholders, which is available on the nationally recognized municipal securities information repositories. Disclosure to date has been excellent in terms of timeliness, content, and format. Quarterly statements include a balance sheet, income statement, cash flow statement, utilization, and management discussion and analysis.

The bonds listed below have the following ratings:

--$106,355,000 Maryland Health and Higher Educational Facilities Authority Hospital Variable Rate Demand Bonds, University of Maryland Medical System Issue, Series 2004A 'AAA/F1+'

--$34,440,000 Maryland health and Higher Educational Facilities Authority Hospital Revenue Bonds, University of Maryland Medical system Issue, Series 2004B(2) 'A'

--$50,950,000 Maryland health and Higher Educational Facilities Authority Hospital Auction Rate Revenue Bonds, Series 2004C(2) 'A'

--$46,250,000 Maryland Health and Higher Educational Facilities Authority Hospital Auction Rate Revenue Bonds, University of Maryland Medical system Issue, Series 2004D(2) 'A'

--$54,625,000 Maryland Health and Higher Educational Facilities Authority Hospital Revenue Bonds, University of Maryland Medical System Issue, Series 2002 'A'

--$99,240,000 Maryland Health and Higher Educational Facilities Authority Hospital Revenue Bonds, University of Maryland Medical System Issue, Series 2001 'A'

--$27,315,000 Maryland Health and Higher Educational Facilities Authority Hospital Revenue Bonds, University of Maryland Medical system Issue, Series 1991B(a) 'A'

--$150,000,000 Maryland Health and Higher Educational Facilities Authority Revenue Bonds, University of Maryland Medical System Issue, Series 2005(1) 'A'

--$27,630,000 Maryland Health and Higher Educational Facilities Authority Hospital Revenue Bonds, Memorial Hospital at Easton Issue, Series 1998(3) 'A'

--$1,965,000 Maryland Health and Higher Educational Facilities Authority, Hospital Revenue Bonds, Memorial Hospital at Easton, Series 1999(3) 'A'

--$25,920,000 Maryland Health and Higher Educational Facilities Authority, Hospital Revenue Bonds, Shore Health System Issue, Series 2004A(3) 'A'

(1) The 'A' represents an underlying rating; the bonds are expected to be insured by AMBAC Assurance Corporation whose insurer financial strength is rated 'AAA' by Fitch Ratings, with a liquidity facility provided by JPMorgan Chase Bank.

(2) This is an underlying rating. The bonds are insured by Ambac Assurance Corporation which is rated 'AAA' by Fitch.

(a) This is an underlying rating. The bonds are insured by FGIC, which is rated "AAA" by Fitch.

(3) These series of bonds will become members of the University of Maryland Medical System as part of this new financing.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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